Solutions to some Chapter 21 problems:

12. a. The put places a floor on value of investment, i.e., less risky than buying
stock. The risk reduction comes at the cost of the option premium.
b. Benefit from upside, but also lose on the downside.

c. A naked option position is riskier than the underlying asset. Investor gains
from increase in stock price, but loses entire investment if stock price is
less than exercise price at expiration.

d. Investor exchanges uncertain upside changes in stock price for the known
up-front income from the option premium.

e. Safe investment if the debt is risk free.

f. From put-call parity, this is equivalent (for European options) to ‘buy bond.’
Therefore, this is a safe investment.

g. Another naked, high-risk position with known up-front income but

exposure to down movements in stock price.

13 While it is true that both the buyer of a call and the seller of a put hope the price
will rise, the two positions are not identical. The buyer of a call will find her profit
changing from zero and increasing as the stock price rises [see text
Figure 21.1(a)], while the seller of a put will find his loss decreasing and then
remaining at zero as the stock price rises [see text Figure 21.2(b)].